Sun.Star: Cebu exporters urge establishment of hedge facility

Cebu-based exporters are asking the Philippine government to hasten the establishment of a proposed $1-billion hedging facility aimed at protecting exporters against the adverse effects of the strengthening peso. “It’s good news but they have to (do) it fast because our industry is continuously bleeding," Michael Basubas, Cebu Furniture Industries Foundation president, said. Basubas is hopeful that government is serious about protecting the country’s export industry which is hurting from the continued appreciation of the peso, among others. “Wala pa man gani nakita sa P280 million fund for exporters, so I hope this time, they will really do something about the industry," he said. (We have not yet seen the P280-million fund for exporters.) Finance Secretary Margarito Teves earlier said government-owned Development Bank of the Philippines will be drawing up mechanisms that will guide the use of the hedging facility. Basubas said hedging mechanisms need to be clarified to exporters as “not many have truly understood what it means." “They need to explain it to us in layman’s term. And we need to further study these options," he said. Philippine Exporters Confederation Cebu executive officer Fred Escalona said hedging is a means to protect or defend against fluctuations in prices of commodities and exchange rate. “Before, exporters did not see hedging as an option because the market was always going north but now the peso is trending southward so karon pa nila nakit-an," he said. (They see it only now.) Hedging has many mechanisms and one is through “forwards," said Escalona. “Supposing there’s a deal at P46.50 (to a dollar), so I tell my bank that I already paid, say 20 percent cash payment but my delivery arrives in the next three months. By dealing with the bank, I can lock in my future income at P46.50. When I have shipped and proved that I can pay through a letter credit, I can negotiate payments with the bank," Escalona told Sun.Star Cebu through a phone interview. But he said exporters need to maintain a good credit line with their respective banks to be able to take advantage of the mechanism. He said exporters were used to making “open arrangements" through exchange of emails or faxes with their direct buyers, which was less expensive. Hedging through forwards, however, may cause additional cost for exporters depending on the bank. Other hedging mechanisms are “options" and “futures." Escalona said options is a privilege sold by one party to another. It offers the buyer the right but not the obligation to buy or sell a security at an agreed upon price during a certain period of time or a specific date. “Let’s say you have $50,000 gi-kita sa P46.50 (based on P46.50 to the US dollar exchange rate), you hold on to your dollars. If gusto nimo i-unload by September, you buy a premium to the option through investment banks dealing with derivatives, betting that the peso will strengthen further in the next few months to about P45," he said. “Granting that by September the dollar is equal to P45, your premium will increase kay duol man siya sa imong target. Ma off-set and losses sa cash," he said. Futures is also another hedging tool exporters can venture. “Futures is a standardized contract traded on a futures exchange to buy or sell a certain underlying instrument at a certain date in the future at a pre-set price," he said. “For example, if the dollar weakens by September, I will go short on the dollars and sell it at today’s price, say P46.50. If by September, granting the dollar is at P45, I will buy it back at P45," Escalona said. With regard to DBP’s proposal, Escalona, who was also a derivatives trader in Europe in the late 1980s, said the bank is “taking the risk in the market to protect exporters." “Di pud ingon nga they are giving it away because when they take positions, ma off-set man ang risk kay mo-kita man sila (they will earn) whatever mechanism they choose. Whatever they gave away will be recovered," he said. On the call of exporters for a P48 to a dollar exchange rate, Escalona said this is “unrealistic." “Now it has gone to around P46 and is expected to be around P40 in the next months or years. I think the hedging fund can maintain the risk for exporters at a realistic range," he said. - SunStar